Post-disaster recovery: tax relief options

Article | November 13, 2024

Authored by Weinlander Fitzhugh

When disaster strikes unexpectedly, whether it’s a hurricane, flood, or wildfire, it leaves more than just physical damage. The financial aftermath can be overwhelming. We understand how challenging this time can be, and we want you to know that there are tax relief options available to help ease some of the burden. 

Tax relief programs and options

The IRS offers a range of tax relief measures for victims of natural disasters. These measures may include extended tax filing deadlines, deferred tax payments, and the ability to claim casualty losses on tax returns. 

The IRS maintains a comprehensive list of tax relief provisions for taxpayers affected by disaster situations. You can find current details on eligible locations, dates, and the specific relief available on their website. 

Here are a few relief programs and options available to many affected taxpayers: 

Relief for farmers and ranchers affected by drought

Drought conditions can severely impact agricultural communities, often forcing farmers and ranchers to sell livestock earlier than planned. This can lead to unexpected taxable gains at a time when finances are already tight.

To support those impacted by severe drought in 41 states, the IRS has implemented an extended replacement period. Farmers and ranchers now have four years to replace the livestock they were forced to sell due to drought. This period may be extended if droughts continue. 

Eligibility

This relief applies to specific regions identified as suffering from severe drought conditions. According to Notice 2024-70, the affected areas include 41 states where drought was reported during the 12-month period ending on August 31, 2024.

The relief specifically pertains to livestock held for draft, dairy, or breeding purposes. It does not extend to animals raised for slaughter, used for sport, or poultry.

How to proceed

Start by verifying your eligibility. Confirm that your area is listed among the IRS’s designated drought-affected regions. This information is available in Notice 2024-70 on the IRS website.

Once confirmed, document your livestock sales, ensuring that your records clearly show these sales were due to drought conditions. Also, ensure you have a plan to replace the livestock within the required timeframe, typically four years, to maintain eligibility for the relief measures. 

Extended deadlines for storm and wildfire victims

The aftermath of severe disasters like hurricanes, tornadoes, floods, landslides, and wildfires can disrupt daily life and business operations, making it tough to meet tax obligations on time. Depending on the date of the disaster, affected taxpayers now have until November 1, 2024, February 3, 2025, or May 1, 2025, to file various federal individual and business tax returns and make tax payments. 

How to proceed

Check whether your county, state, or region is included in the IRS’s disaster relief announcements available on their website. Once you’ve confirmed eligibility, revise your tax filing and payment schedules to align with the new deadlines to take full advantage of the extension. 

Dyed diesel penalty relief

In some disaster situations, fuel shortages can occur. Dyed diesel fuel is typically designated for off-road use, like in farming equipment, and is taxed differently than on-road fuels. The IRS provides relief that allows affected businesses and individuals to use this fuel for highway vehicles without facing penalties, helping to address fuel shortages and supporting recovery efforts. 

How to proceed

Verify that your location is within the regions covered by the IRS’s dyed diesel penalty relief. Once you’ve confirmed eligibility, make sure you maintain accurate records of your fuel usage during the relief period. Keeping detailed logs will be important when standard regulations resume. 

Qualified disaster relief payments

In times of disaster, you might receive payments to help with personal or family needs. Qualified disaster relief payments received from a government agency are generally excluded from your gross income. This means you don’t have to pay taxes on these amounts. This includes payments for reasonable and necessary personal, family, living, or funeral expenses, as well as payments for repairing your home or replacing its contents. 

How to proceed

Save any records or documentation of the payments you receive and the expenses they cover. It’s also wise to consult a CPA to ensure the payments are correctly reported on your tax return so you fully benefit from the exclusion. 

Retirement plan distributions

If you’re participating in a retirement plan or an IRA, you might be eligible to take a special disaster distribution that’s not subject to the additional 10% early distribution tax. Plus, you can spread the income over three years. 

You may also be eligible for a hardship withdrawal if you’re in a federally declared disaster area, but each plan has specific rules, so you will need to consult your plan’s specific guidelines. 

How to proceed

Contact your plan administrator to understand the distribution options that may be available to you and whether you can repay the distribution. It’s also important to consider the tax implications. While the early withdrawal penalty may be waived, taxes could still apply. A CPA can help you weigh the pros and cons of a retirement distribution and ensure you navigate the process smoothly. 

Casualty loss deductions

A casualty loss arises when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event, such as a natural disaster. The IRS allows taxpayers to deduct casualty losses on their tax returns, potentially lowering their taxable income and providing financial relief.

Eligibility criteria

• Personal-use property: you can deduct casualty losses related to personal property only if the loss is attributable to a federally declared disaster.

• Business or income-producing property: casualty losses related to business assets or income-producing property, such as rental properties, are deductible regardless of federal disaster declarations.

Calculating the deduction

To accurately calculate your casualty loss deduction:

1. Determine adjusted basis: find the property’s adjusted basis, which is typically the original cost plus improvements minus any depreciation you’ve claimed.

2. Assess fair market value decrease: calculate the decrease in fair market value of the property as a result of the casualty – the difference between the property’s value immediately before and after the event.

3. Calculate the loss: for property that is not completely destroyed, the deductible loss is the lesser of the adjusted basis or the decrease in FMV, reduced by any insurance or other reimbursements.

4. Apply limits: for personal-use property, reduce each casualty loss by $100 and then reduce the total of all such losses by 10% of your adjusted gross income (AGI). This may significantly impact the deductible amount.

Impact of reimbursements

If you receive insurance payments or other reimbursements, these amounts must be subtracted from your calculated loss. In some cases, reimbursements may exceed your adjusted basis in the property, resulting in a taxable gain. However, you may defer recognizing this gain if you use the reimbursement to purchase similar property within a specific timeframe.

How to proceed

Start by documenting the damage as soon as it’s safe to do so. Assess the extent of the damage and gather evidence such as photographs, repair estimates, and appraisals to support your claim. Promptly file insurance claims with your provider and keep copies of all correspondence and payments received. 

Contact a CPA to ensure you accurately calculate your deductible casualty loss and account for any limits and reductions. They can also help you complete Form 4684, Casualties and Thefts, which will need to be submitted with your tax return. 

We’re here to support you

Recovering from a disaster is about more than repairing physical damage – it’s about regaining stability in all aspects of your life. We understand the tax implications can be complex and sometimes overwhelming. Please don’t hesitate to reach out to us with any questions or for assistance. Together, we can work toward getting you back on your feet.